Quick note: We'll be scaling back our newsletter to once every 2 weeks with a different format. Look forward to more original research and reading lists from our team.
How Steem Thefts Could Shape The Legal Future of Crypto
Steem’s original mission was to be the first decentralized social media platform in history. Though the project hasn’t succeeded, it’ll likely still make history but for a different reason altogether. Recent events on the Steem blockchain could set legal precedents for blockchain networks - particularly PoS ones - in ways only a few could foresee.
Though Steem’s ongoing community issues started a few months ago, last week things took a turn for the worst. Steem Network PoS Validators, aka Witnesses, decided to publicly steal balances of specific users or in their words, “punish criminal activities committed by these users” by confiscating their Steem Tokens.
Though it’s easy to dismiss this event as inconsequential due to Steem’s relatively small userbase, let us not forget that the worst and most obscure ICO sales of 2017 and 2018 heavily influenced regulation around all subsequent token sales. Thoughtful folks like Andreas Antonopoulos have already assessed and commented on possible legal consequences for the crypto space.
A Brief Summary of Events
In a previous newsletter, we discussed how Justin Sun’s acquisition of Steemit the company - which played an important role in the Steem ecosystem - went horribly awry. Sun’s acquisition and efforts to control the blockchain using Steemit token balance backfired and triggered a fork away from the Sun-controlled-Steem blockchain to a separate blockchain called Hive. The forked chain opted-to slash Steemit’s balance to avoid Sun’s control of the new chain. The forked network gained support from many active community members and apps. Moreover, Hive's token price has largely outperformed that of Steem’s token.
Of course, Sun and his supporting witnesses are unhappy about the chain of events, especially since Steem community members who led the Hive fork still have their Steem tokens and will likely sell after a 13-week gradual unlocking period. Steem witnesses claimed this was criminal activity, and what’s more, an attack on the Steem network. So, they decided to punish the “criminals,” i.e. the community members leading the Hive fork, by confiscating the Steem tokens that the Hive supporters held. This was made public via a Steem hardfork announcement on May 19th and executed one day later. Sun tried to distance himself from the hard fork by tweeting critically about Vitalik Buterin and the media for their coverage while claiming to seek legal action against Hive network validators.
Comparison of Hive and Steem Token prices since the fork
Why Does This Matter?
The Steem network witnesses’ actions, and the exchanges that supported the hard fork, are in clear legal violation in almost all jurisdictions. Financial assets, in some cases approaching a million dollars, have been diverted at will from their rightful owners to a new account with an unknown owner. This incident represents the first catastrophic failure of a PoS network model.
More importantly, it brings to light the question of sovereign states’ legal jurisdiction over blockchain networks. Exchanges and most PoS network operators are known entities that can be sued in their corresponding jurisdiction. Binance CEO CZ’s statement about the incident hones in on this topic. CZ critiques calls for legal action against malicious PoS operators and exchanges that execute hard fork code which allows the illegal action. Instead, Binance’s CEO proposes that affected victims launch a competing fork.
If Steem witnesses are held legally accountable, this will destroy the “decentralization” narrative for PoS networks. Many new PoS networks are aware that they're not out of reach from the long arm of the law. They explicitly restrict token sales in certain jurisdictions to avoid potential violations of securities laws. Nevertheless, legal jurisdiction over network operators has remained uncharted territory and has empirically been left only to network code and crypto-economic design to handle any malicious behavior.
⚡️ Bitcoin On-Chain Fees and Why Fees are Necessary
Speculation around BTC price post-halving resulted in increased on-chain activity reminiscent of 2017 and, more importantly, 2017 transaction fee levels. Fast on-chain tx fees regularly exceeded 500k sats (~ a few dollars) per transaction which reignited the debate around transaction fees.
Since tx fees are increasingly more important for Bitcoin network security, it may be worthwhile to start educating users on how high fee levels are needed and how they offset decreasing block rewards. This topic is commonly referred to as the "Bitcoin fee market." It encourages higher on-chain fees and the use of alternative solutions such as LN or side-chains for low-to-medium value transactions.
Unconfirmed Tx fee levels. source: mempool.space
⚡️ ICYMI: Bitcoin Pizza Day and 11-year old UTXO spent
This week Bitcoiners celebrated the 10th anniversary of Bitcoin Pizza day, a day where Laszlo Hanyecz spent ~10,000 BTC to purchase 2 large pizzas.
Additionally, Bitcoin archeologists recently revealed and celebrated the spending of an 11-year old UTXO. Previously, the most recent transaction involving a 2009 UTXO had occurred in 2017.
🔹 tBTC Issue and Schedule Change
The tBTC protocol, featured in last week's newsletter, hit its first roadblock just two days after its mainnet launch. In the team's post-mortem, it was revealed that the issue stemmed from insufficient testing for the SC feature that supports different BTC address formats. The issue resulted in the failure of tBTC redemptions and exposed some funds to risk which required the halting of tBTC operations using a one-time-use emergency switch. Afterward, the team announced a plan to relaunch the tBTC protocol using a release candidate approach. The re-launch plan hasn't changed the Stake Drop date which is still scheduled for June 8th.
🔹 Tornado.Cash Delivers On Decentralization Promises
Ethereum privacy app Tornado.Cash delivered on their promise to keep the app 100% decentralized. The team set the smart contract operator address to 0, meaning that no one can change the SC code anymore. As it stands, the only way to respond to any SC bugs will be to deploy a new version of the protocol that users can opt to join. Despite these risks, autonomous SC with minimal human control reflects the true spirit of decentralization, and it's exciting to see more teams moving in this direction.
🤖 Cypherpunk Women
An anthology all about bitcoin, curated and edited by Leigh Cuen featuring thoughtful pieces from Linda Xie, Meltem Demirors, Alena Vranova, Soona Amhaz, and others.
Disclosure: Volt Capital and/or its partners may have exposure to some of the cryptocurrencies mentioned in this newsletter.